It has been a pretty ugly week or two for tech stocks. Netflix (NASDAQ:NFLX) was brutalized in trading today, closing under $80. Granted, that’s only back to early 2010 levels — but the precipitous drop from over $300 leaves some unlucky folks with a 75% loss peak-to-trough. And as I wrote earlier, Netflix might never shake the Qwikster calamity that is weighing on shares.
Amazon (NASDAQ:AMZN) is next in line, selling off by as much as 15% after hours. Amazon stock easily will open under $200 tomorrow morning. Sure, Amazon stock is sitting on a good gain year to date and the decline still will leave investors in the green for 2011. But anyone who bought recently at $240 is not going to be pleased.
Last week, Apple (NASDAQ:AAPL) posted a rare earnings miss that weighed on stocks, and the company still is trading under $400 per share. Still up over 20% in 2011, but down from a peak of almost $430.
IBM (NYSE:IBM) shares also lost 7% in a few days after earnings matched estimates but revenues missed. Like Apple, Big Blue is up 20% year-to-date after the declines.
Do you see a trend here? All of these tech stocks were darlings of the stock market for the first several months of the year, and all have seen selloffs recently.
Tech’s outperformance has been noted by most investors, and it’s no surprise that traders have bid up shares of these top technology stocks. After all, there are few other options for growth. The Amazon Kindle and Apple iPad are perhaps the only must-have items this holiday season. Netflix earnings showed a significant jump year over year despite the loss of subscribers because of the Qwikster mess. IBM continues to help businesses stay competitive and efficient in a high-tech age.
However, the weakness in tech should be a warning side. Technology stocks might be the most crowded trade in the market — and you do not want to be the last shareholder to leave the room on this one.
If you want to know how desperately the market wants tech stocks to rally, consider that the Fidelity Dividend Growth Fund (MUTF:FDGFX), a massive mutual fund with almost $8.5 billion under management, currently lists Apple stock as its top holding! This is a dividend focused fund — and Apple doesn’t even pay a dividend!
Why would the so-called “smart money” — the Fidelity fund manager is Lawrence Rakers if you’re curious — so blatantly violate the advertised philosophy of this fund to chase a non-dividend payer like Apple?
Simple: Mr. Rakers will lose his job if he doesn’t outperform the market. And like so many others, he thinks that Apple is a sure bet.
This is hardly a bubble. Many tech stocks have bright futures, and you’d be a fool to think Apple will crash. But you’d also be a fool if, like this fund manager, you are chasing tech stocks simply because you envy the performance.
Take a hard look at your tech stocks right now and ask yourself which companies are fairly valued and which ones are overbought. Ask yourself which ones have the brightest growth prospects and which ones will simply track (or lag) the market.
Now might be a good time to get out while some of these plays still have 20% returns on the year.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.
